Quick Facts

Pakistan’s economic freedom score is 55.6, making its economy the 121st freest in the 2015 Index. Its score has increased by 0.4 point since last year, reflecting improvements in investment freedom and freedom from corruption that are largely counterbalanced by deteriorations in labor freedom and business freedom. Pakistan is ranked 25th out of 42 countries in the Asia–Pacific region, and its overall score is below the world and regional averages.

Pakistan’s economic freedom has advanced modestly in recent years. Since 2011, economic freedom in Pakistan has increased by 0.5 point, led by advances in investment freedom, monetary freedom, and freedom from corruption. However, gains have been outnumbered by losses among the 10 economic freedoms.

Large sections of the population live in poverty and survive through subsistence agriculture. Inefficient regulatory agencies inhibit business formation. Access to bank credit also undermines entrepreneurship, and the financial sector’s seclusion from the outside world has slowed innovation and growth.

Background

Prime Minister Nawaz Sharif took office in June 2013 and has had to contend with terrorism, sectarian violence, and a well-organized insurgency along the border with Afghanistan. The army stepped up its military operations in North Waziristan in June 2014 following a major attack on the Karachi airport that killed nearly 36 people. Sustained street demonstrations in August and September 2014 led by Tehreek-e-Insaf party chief Imran Khan and religious leader Tahir ul-Qadri have weakened Sharif and increased civil–military tensions. Pakistan has privatized some state-run industries, but the economy is still heavily regulated, and poor security discourages foreign investment.

Corruption, lack of accountability, and lack of transparency continue to pervade all levels of government, politics, and the military despite some improvements in democratic processes. Oversight mechanisms remain weak. Property rights are not protected effectively. The functioning of the higher judiciary has improved, but delays, corruption, intimidation, and political interference are endemic in the broader justice system.

Pakistan’s top individual income tax rate is 35 percent. The rate for salaried employment is lower. The top corporate tax rate is 35 percent. Other taxes include a value-added tax and a tax on interest. Overall tax revenue equals 10.4 percent of domestic income. Public expenditures amount to 21.5 percent of domestic output, and public debt equals 63 percent of GDP.

Starting a business takes an average of 19 days and 10 procedures. Completing licensing requirements still takes about 250 days. The rigid labor market keeps a large portion of the workforce in the informal sector. The government controls fuel prices but in 2014 reduced electric power subsidies to narrow the budget deficit and meet the terms of IMF conditionality.

Pakistan’s average tariff rate is 9.5 percent. Imports may face additional bureaucratic barriers. Pakistan’s “Investment Policy 2013” was designed to facilitate foreign direct investment, but the security environment is a deterrent. The financial system remains subject to government interference, and the state retains considerable ownership in the banking sector. The government often directs banks’ lending to priority sectors.